The Pound Sterling Myth

Just as I write this article, the pound has risen against the US Dollar to $1.36 (its highest level since the Brexit vote), very close to what it was when results starting coming in from the local authorities in the EU referendum on the evening of 23rd June last year. I therefore write the following part of this article largely retrospectively.

All of Project Fear’s economic predictions were wrong except, I will admit, for their prediction about sterling. They correctly predicted that there would be a significant fall in the value of the pound sterling in the immediate aftermath of a leave vote and the pound has fallen in value by about 15% on average. However, remoaners seem to want to think that the value of the pound is the only, or at least the main, indicator of the strength of the UK economy. This is, as any economist will tell you, nonsense. There are other indicators such as the FTSE 100, the FTSE 250, our output, our exports, our unemployment rate, the amount of foreign direct investment we attract and the rate of our economic growth which are equally as important, if not more important, than the relative value of sterling. These other indicators are very encouraging indeed as my earlier article shows. All of these indicators must together be taken into account before a judgement can be made on the strength of the UK economy.

Even if we are to take the value of sterling in isolation, the remoaners are far from telling the whole story. Firstly, they all just presume that they can *know* for certain that the devaluation was indeed *caused* by the Brexit vote alone. Correlation does not, however, prove causation – it could just be a coincidence or other factors could be involved. Jacob Rees-Mogg MP has pointed that both the OECD and the IMF had said before the referendum that the value of the pound was too high – even strong remainer Ken Clarke MP has admitted this. Even Lord (Mervyn) King, the former Governor of the Bank of England, has said that the devaluation is a welcome fact. Therefore, a devaluation was only a matter of time and the Brexit vote merely brought forward this already-inevitable devaluation. The columnist Peter Hitchens foresaw a devaluation way before the referendum and states that the devaluation has nothing to do with the Brexit vote and would have also happened if we had voted to remain. Remoaners often imply that, so long as we are signed up to the European project, the pound’s value against the Euro will remain high. This is clearly nonsense as, after Black Wednesday on 16th September 1992 (which was caused by our membership of the European Exchange Rate Mechanism, ERM), sterling saw 17% wiped off its value.

Remoaners go on to presume that this devaluation has only been a negative for the UK economy. This is false. It has not led to out of control inflation as many predicted – inflation actually fell in October of last year, 4 months after the Brexit vote. Jacob Rees-Mogg has pointed out that the last two significant devaluations before the Brexit vote (in 1931 and in the early 1990s) both resulted in lasting periods of prosperity and rising living standards. News of the devaluation has been happily received by UK exporters who have long said that the value of the pound has been too high for too long. The devaluation has made their exports cheaper and more competitive relatively-speaking and his consequently increased demand for our exports overseas. In fact, in September of last year, UK exports reached their highest level in 20 years and UK exports have risen by 11.5% over the last year. Finally, remoaners are always negative and pessimistic about our chances of getting a good free trade agreement with the EU agreed by midnight on 29th March 2019. However, even in the most unlikely and worst-case scenario of there being no Brexit deal at all by then, the average ~15% devaluation would easily dwarf an average most-favoured nation (MFN) goods tariff with the EU of just 5%.

(The above article is largely an excerpt from an article I wrote for the “The Bruges Group” website’s blog)

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